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Inclusive Capitalism

Advice for entrepreneurs on alleviating poverty from the grassroots up.

by TED LONDON

In 1989 I traveled to Malawi, hoping to put my MBA and engineering skills to work as a Peace Corps volunteer. Over the course of two years I was tasked with advising some of poorest people in the world on how to enhance their business enterprises. The Peace Corps had always stressed that its volunteers would learn more than they would teach—and that was certainly true in my case. My Malawian colleagues were very smart and very creative, and though I’d come to help them and tell them what they should do to grow their businesses, beyond a little training in marketing, costing, or cash flow, they didn’t necessarily need me to tell them what they should do. The biggest impacts, I discovered, came from jointly innovating to create solutions that neither I, nor they, could have come up with or implemented on their own.

By the early millennium certain people, including my friend and advisor, Stuart Hart, started thinking about the role that profitable, scalable, impact enterprises could play in alleviating poverty. He and C.K. Prahalad wrote an influential article discussing the dormant entrepreneurial and commercial potential of the world’s 4 billion poorest people, who constitute the base of the economic pyramid. Their work highlighted an “invisible opportunity” to create a more inclusive capitalism and they called upon multinational corporations to reassess the assumptions they’d made about these markets as viable business prospects.

Today, the debate around the base of the pyramid has changed—we’re no longer asking Should we be doing this?, but rather, How can we do this better?

Over the course of the past decade, interest in creating impact enterprises for the base of the pyramid (BoP) has increased dramatically. There’s a growing portfolio of these enterprises, and a growing number of entrepreneurial leaders seeking to craft more of them. However, many of these new BoP impact enterprises are not as good as we want them to be—or as good as they have been represented to the world—and few of them have yet achieved the necessary scale to which we aspire. Today, the debate around BoP focus has changed—we’re no longer asking Should we be doing this?, but rather, How can we do this better?

In the course of the past two decades (and across some eighty countries) I have lived in, worked with, and studied BoP markets and enterprises, and I have seen the lessons I first learned in Malawi underscored time and again: The most enduring solutions to enterprise challenges grow out of collaboration, mutual respect and patience, co-creation, and a deep understanding of impact.

How can we understand and enhance our poverty alleviation impacts, especially if poverty has multiple dimensions?

This last component is too little appreciated by enterprise leaders, for whom, oftentimes, a crucial value proposition of their venture is poverty alleviation. The number one lesson taught in business school is that business must create value for those they seek to serve. In other words, building viable enterprises that will have an impact requires a deep understanding of how to assess and enhance impact. Yet enterprise leaders operating in BoP markets frequently ignore or poorly execute this lesson, all too often with perilous consequences for the success of their venture. Without a clear appreciation of the value proposition the enterprise offers, enterprises struggle to build viable business models or improve existing ones.

Enterprise leaders must be able to answer the following questions: What is our value proposition, and how much and what type of value are we creating for the BoP? How can we understand and enhance our poverty alleviation impacts, especially if poverty has multiple dimensions?

Understanding poverty alleviation outcomes is not a luxury or a cost of doing business to satisfy partner expectations; it is a necessity in the early stages of a venture, and especially as the enterprise seeks growth and scale. To get there, we have to more holistically define poverty, a word with multiple connotations. Poverty is more than simply the absence of economic well-being. According to the World Bank, for example, poverty comprises not only material deprivation but also risk, vulnerability, and powerlessness. In other words, individuals and communities also must be able to help themselves and influence the world around them. Furthermore, geographic, social, and other types of isolation can impoverish individuals and communities through a sense of powerlessness.

Framed holistically, these dimensions can be summarized as a lack of three types of well-being: economic, capability, and relationship. These are often found in combination, but substantial deficits in any of them alone can have devastating impacts on the lives of the poor. BoP impact enterprises actively manage toward producing significant net positive changes along multiple dimensions of well-being. In order to help would-be impact enterprises assess whether they are producing a net positive effect, enterprise team leaders need to ask two key questions about their ventures: Who is being affected? and How are they being affected?

The answers to these questions provide more than just a snapshot of today’s reality; they also provide a forward-looking picture, suggesting ways to improve the net positive value proposition on the ground. Consider the case of microfinance. Giving poor people access to credit is a powerful thing. At the same, though, they are being given debt. I’m certainly not saying, “Focus on the negatives.” But I am saying that there are almost certainly positive and negative impacts out there to be found, and your understanding of both needs to be built into your assessment of the value creation opportunity. If the enterprise’s value proposition is understood with sufficient rigor and thoroughness, the leadership team will be better positioned to craft strategies for enhancing the positive and mitigating the negative.

In order to cope with multidimensional nature of poverty alleviation and local value creation, I designed a BoP Impact Assessment Framework, with the intent of helping enterprise leaders assess and enhance their value propositions (depicted below).

The vertical axis poses the question, “How are your constituencies being affected?” Alleviating poverty is not only about economic survival, but also prospering as a human being, including having the capabilities to influence the course of your life. It also has to do with the network of interactions that begin in the family and the household and move outward into the larger community—interactions that help ensure that through relationships, your voice is being heard.

The first of these, economic well-being, encompasses changes in income, income stability, assets, liabilities, consumer surplus, and economic productivity resulting from the enterprise’s activities. It has to do with the flow and stock of economic capital. The second, capability well-being, incorporates changes in physical, intellectual, and psychological well-being (things such as health, skills, and self-esteem, for example) resulting from the enterprise’s activities. Broadly, this is about the ability to influence one’s own situation or, as some have phrased it, the opportunity to flourish. The third, relationship well-being, captures changes in roles, status and values, access to support, levels of dependence on and responsiveness of those in positions of power, and quality of the local physical infrastructure and environment resulting from the enterprise’s activities. It is about respect, having your voice heard, and connections to individuals, institutions, and the surrounding context.

The horizontal axis poses the question, “Who is being affected?” Here, I consider the basic constituencies of an enterprise: seller, buyer, and community. These constituencies can vary depending on the nature of the business. The community column ensures that other impacts that occur locally are captured—things like jobs created or lost, impacts on other local enterprises, changes in access to information or views about gender and caste, gains or losses in geographic and social isolation, and increases or decreases in water quality, land, and local biodiversity.

The information yielded from this framework is designed to provide more than a snapshot of current social performance or milestones achieved. It offers an active, forward-looking picture, focused on both the who and the how of a value proposition. It invites a granular investigation of gains and losses in local value and the opportunity for enhancing value creation through business activities. Remember that value creation requires recognizing that the goal is to generate net-positive changes.

Certainly a local buyer or seller may do well by investing his or her limited capital in your business, but this person may also be taking on unaccustomed risk. And a new enterprise may result in more choices, lower prices, and better access to a good or a service; that success may also mean that indigenous competitors are facing greater competition that they likely don’t appreciate. Empowering women as buyers or sellers may greatly improve the economics of their families, but it may also change the structure and stability of those relationships. Given the complexity of BoP markets, a deep understanding of the opportunity to enhance mutual value must be at the heart of an enterprise’s efforts. Local perspective is crucial, and the analysis of the relative importance of various impacts should incorporate the views of those who face poverty on a daily basis.

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